Energy costs spark inflation hike

Spiralling energy tariffs sparked a further jump in inflation today and left the Government facing a bigger-than-expected bill for state benefits.

In a further sign of the misery faced by UK households this year, CPI inflation rose to 5.2% last month from 4.5%, equalling the record high of September 2008 and dwarfing average wage growth of just 1.8% a year.

The Office for National Statistics (ONS) said gas and electricity jumped 13% and 7.5% respectively, food shot up 6.4%, communication costs, driven by mobile phone charges, increased 5.9% and transport prices gained 8.9% on a year ago.

September's inflation rate is traditionally used to calculate April's rise in state benefits, although the Government has yet to confirm this will happen.

If it does, the single state pension will increase by £5.31 to £107.46 a week, while jobseeker's allowance will increase by £3.51 to £71.01 a week.

At a time when Chancellor George Osborne is attempting to reduce borrowing levels, the Institute for Fiscal Studies estimates the inflation spike will add an unexpected £1.8 billion to Treasury benefit calculations for 2012/13.

However, the figures are also used to determine business rates, which could result in companies paying an extra £1.3 billion next year, including £350 million more from the hard-pressed retail sector.

Jonathan Loynes, chief economist at Capital Economics, said the unexpectedly sharp rise in September's figures had been a "nasty surprise".

The update from the ONS also highlights the pressure on those who are reliant on savings interest to help pay for rising food and fuel bills.

At a time of record low interest rates, comparison website Moneyfacts said to beat inflation a basic rate taxpayer needed to find a savings account paying 6.5%, while a higher-rate taxpayer required an account at least 8.67%.

Today's rate of 5.2% is more than double the Bank of England's inflation target of 2%, a benchmark the central bank last hit in November 2009.

October's figure is likely to be just as high but economists and the Bank agree that the rate will start to fall back next year as January's VAT hike to 20% falls out of the annual comparison.

This view was reinforced earlier this month when the Bank announced it would pump an extra £75 billion into the economy, despite the threat such a move would pose to inflation.

Chris Williamson, chief economist at Markit, said the "misery index" - a measure combining both inflation and unemployment - was at its highest level in the UK since October 1992.

He added: "UK and US households are under the greatest pressure in terms of rising prices and job worries for 19 and 28 years respectively."

It will be the first time the uprating of state benefits is calculated using CPI rather than the retail prices index (RPI) rate of inflation, which rose from 5.2% to 5.6% in September, the highest rate in 20 years.

If the calculation was still based on RPI, the single state pension would have been £108.42 and the joint one would have been £173.36.

TUC general secretary Brendan Barber said: "This cut could slash public sector pensions, as well as many in the private sector, by nearly 30% over the next three decades, and send many more people into poverty in retirement."